Life Insurance Exam Preparation Flashcards

Vocabulary-style flashcards covering the basic principles, legal concepts, policy types, and provisions of life insurance and annuities based on the XCEL review notes.

Insurance

A legal contract that transfers an uncertain risk from one party to another through the pooling or accumulation of funds.

Indemnify

To restore a person to the financial position they experienced prior to the insured loss.

Stock Insurance Company

An insurance company owned by private investors (stockholders) that issues non-participating policies and aims to make profits for its shareholders.

Mutual Insurance Company

An insurance company owned by its policyholders who receive a share of surplus revenue in the form of policy dividends.

Participating Insurer

An insurer (typically mutual) where policy owners receive a share of surplus revenue through policy dividends.

Reinsurer

An insurance company that accepts risk from a primary insurer (ceding company) seeking to limit its loss exposure.

Domestic Insurer

An insurance company organized and incorporated in the state in which it writes business.

Foreign Insurer

An insurer authorized in one state but organized and incorporated under the laws of a different state.

Alien Insurer

An insurer organized under the laws of a different nation.

Producer

An individual licensed by the state regulatory authority to solicit, sell, or transact insurance products with the public.

Fiduciary

A position of financial trust and confidence held by an agent relative to both consumers and insurers.

Actuary

A professional who calculates policy rates, reserves, and dividends.

Law of Large Numbers

A principle stating that the greater the number of homogeneous loss exposures, the more accurately the overall likelihood of loss can be predicted.

Adverse Selection

The tendency for higher-than-average risks to seek out insurance more frequently than lower-risk individuals.

Peril

The immediate and specific cause of a loss.

Hazard

A condition that increases the possibility that a loss will occur.

Pure Risk

An insurable type of risk where there is only the potential for loss and no potential for gain.

Speculative Risk

A type of risk that offers the opportunity for both gains and losses and is therefore not insurable.

C.L.O.C.

A mnemonic for the four essential elements of a valid contract: Competent parties, Legal purpose, Offer and acceptance, and Consideration.

Aleatory Contract

A contract where the value exchanged is unequal and based on an uncertain future event.

Contract of Adhesion

A contract prepared by one party (the insurer) where the other party (the applicant) must accept the terms as written without negotiation.

Unilateral Contract

A contract where only one party (the insurer) makes an enforceable promise.

Insurable Interest

A financial interest in a person's life that must exist at the time of application for a life or health insurance contract to be legally enforceable.

Warranty

A statement guaranteed to be true in every respect; if found untrue, it can be grounds for revoking the contract.

Representation

A statement made by an applicant that is considered to be true and accurate to the best of their belief but is not guaranteed.

Estoppel

A legal principle that prevents an insurer from escaping the consequences of its agent's actions or misleading statements.

Term Life Insurance

Pure death protection provided for a limited period with no cash value, often considered the cheapest type of life insurance.

Whole Life Insurance

Permanent life insurance providing a death benefit for the entire life of the insured, level premiums, and living benefits such as cash values.

Universal Life Insurance

A flexible-premium whole life variation characterized by adjustable face amounts, cash value withdrawals, and potential investment gains.

Modified Endowment Contract (MEC)

A policy that is overfunded according to IRS tables and fails the seven-pay test, resulting in the loss of favorable tax treatment.

Incontestable Clause

A provision prohibiting the insurer from questioning the validity of the contract after it has been in force for a specified period, typically $2$ years.

Grace Period

A specified period after a premium due date during which the policy remains in force even if the payment has not been received.

Non-Forfeiture Options

Choices available to a policyowner regarding cash value when surrendering a policy, including Cash Surrender, Extended Term, and Reduced Paid-Up.

Settlement Options

The methods by which policy proceeds are paid out, such as Lump-Sum, Interest Only, Fixed Period, Fixed Amount, and Life Income.

Waiver of Premium Rider

A rider that waives premium payments if the policyowner becomes totally and permanently disabled, keeping the policy in force without providing cash payments.

Accidental Death Benefit Rider

Also known as double indemnity, it pays an additional sum (often double or triple the face amount) if the death results from an accident.

Mortality Factor

A measure of the number of deaths in a given population used by insurance companies to predict life expectancy.

Viatical Settlement

The sale of a life insurance policy to a third party for a percentage of the death benefit by a person with a terminal illness.

Primary Insurance Amount (PIA)

The basis for determining the full amount of Social Security retirement benefits for an eligible person at age $65$..

Annuity

A financial product designed to protect against the risk of living too long by providing a guaranteed stream of income for a specified period or life.

Exclusion Ratio

A calculation used to determine the portion of an annuity benefit payment that is considered a tax-free return of principal versus taxable interest.

ERISA

The Employee Retirement Income Security Act of $1974$, which provides minimum standards for pension and employee benefit plans.

Simplified Employee Pension (SEP)

A retirement plan where an employer contributes to IRAs established for employees, allowing higher contribution limits than traditional IRAs.

Human Life Value Approach

A method of calculating the needed amount of life insurance by determining the total earnings a person is expected to make over their lifetime.

Key Person Insurance

Life insurance purchased by a business on an owner or manager to prevent financial loss and cover the cost of finding a replacement if they die prematurely.